The Alberta Court of Appeal has overturned a controversial
decision of the Alberta Court of Queen's Bench regarding
court-approved arrangements in Alberta. The Alberta Court of
Queen's Bench had granted an order providing shareholders of
Alberta-incorporated Alberta Oilsands Inc.
("AOI") with the right to vote in
respect of AOI's proposed acquisition of Alberta-incorporated
Marquee Energy Ltd. ("MEL") by way of an
arrangement under the Business Corporations Act (Alberta)
(the "ABCA") (see our
November 2016 MarketCaps). Typically, courts only grant a right
to vote to the shareholders of the target company (in this case,
MEL), and not the acquiror, on a proposed arrangement of the target
company. MEL appealed the decision, and the Alberta Court of
Appeal allowed the appeal and set aside the provision granting AOI
shareholders the right to vote.

Gowling WLG Focus

The Court of Appeal decision elicited a sigh of relief in
Canadian legal and business communities as it realigns Alberta
jurisprudence with the body of case law regarding plans of
arrangement that has been decided to date. The Alberta Court of
Appeal held that "fairness" must be examined from the
perspective of the corporation being arranged, and it is not bad
faith for a transaction to be structured in a way that will not
require a shareholder vote, where there are other structures that
would require such a vote.

The Alberta Court of Appeal's Decision

As one may recall from our previous MarketCaps article on this
subject, MEL and AOI intended to merge to combine the capital of
AOI with the oil and gas assets of MEL. The parties
originally considered effecting that merger by way of a horizontal
amalgamation under the ABCA, which would have required the
shareholders of MEL and AOI to approve the amalgamation and would
have afforded those shareholders with dissent rights. It was
thought that, if the transaction proceeded in this manner, a
significant shareholder of AOI (known to oppose the transaction)
would vote against the amalgamation and, if it were approved,
exercise its dissent rights. Instead, the parties decided to
proceed by way of a court-approved arrangement pursuant to which
all of the outstanding securities of MEL would be tendered to AOI
in exchange for newly issued securities of AOI, thereby making MEL
a wholly-owned subsidiary of AOI. After the arrangement was
completed, the two entities would amalgamate by way of a vertical
amalgamation under the ABCA that did not require shareholder
approval nor afford shareholders with dissent rights.

After applying the test1 in BCE Inc. v 1976
Debentureholders, 2008 SCC 69
("BCE"), the trial judge ruled
that the arrangement was not "fair and reasonable" unless
the AOI shareholders were given a right to vote on the arrangement,
and a right to dissent.

The Court of Appeal stated that the ABCA does not contemplate or
require court approval of the transaction from the perspective of
any person other than the stakeholders of MEL, the corporation
being arranged. The Court noted that fundamental changes of
AOI were not being contemplated in the MEL arrangement and thus the
BCE "fair and reasonable" test does not apply to
AOI stakeholders. The Court also noted that the directors of
AOI are prima facie entitled to execute fundamental
changes of AOI in accordance with the ABCA and need only have
shareholder votes when required by the statute.

The Court held that it is not bad faith for the directors to
structure a transaction to avoid dissent rights. It noted that the
liquidity of the corporation would be impacted if a minority of
shareholders opposing the business plan dissented and cashed out.
The Court concluded that there was therefore a legitimate business
reason in this case for structuring the transaction as an
arrangement.

The Court also noted other business advantages of proceeding by
way of an arrangement: it permitted the use of a registration
exemption under the United States Securities Act of 1933
with respect to U.S. shareholders, and it enhanced
"transactional certainty" by not requiring a vote of AOI
shareholders. The Court said that there is merit to the position
that the choice of the structure of the transaction should not be
taken from the directors without an express statutory provision to
that effect and that on balance, having regard to the deference
owed to the directors, the need for certainty and the absence of
any statutory right to vote, a meeting of AOI's shareholders
should not be required.

The Court concluded that "[i]n summary, the trial
judge's conclusion that the transaction structure was not
selected in good faith was based on errors of principle. First of
all, it was based on the idea that the [MEL] and [AOI] shareholders
should be treated equally, something not found in the statute.
Secondly, it examined "fairness" from the perspective of
[AOI], not [MEL]. Thirdly, it assumed that it is bad faith for the
directors to structure a transaction in a way that will not require
a shareholder vote, where there are other structures that would
require such a vote."

Looking Ahead

For the time being, the surprising curveball decision that was
rendered by the Alberta Court of Queen's Bench is "out of
play." It appears that the Alberta Court of Appeal has
restored the status quo to the court-approved arrangement process
under the ABCA, but we will continue to monitor the situation going
forward.

Footnote

1 The application must satisfy the court that: (1) the
statutory procedures are met; (2) the application is put forward in
good faith; and (3) the arrangement is fair and reasonable, in the
sense that: (a) the arrangement has a valid business purpose; and
(b) the objections of those whose rights are being arranged are
resolved in a fair and balanced way (BCE at para
156).

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